Philadelphia Consolidated Holding Corp - Additional Proxy Soliciting Materials - Non-Management (definitive) (DFAN14A)
July 23 2008 - 2:10PM
Edgar (US Regulatory)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant
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Filed by a Party other than the Registrant
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2)
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to §240.14a-12
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Philadelphia Consolidated Holding Corp.
(Name of Registrant as Specified In Its Charter)
Tokio Marine Holdings, Inc.
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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No fee required.
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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Aggregate number of securities to which transaction applies:
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(3)
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Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
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(4)
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Proposed maximum aggregate value of transaction:
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(5)
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Form, Schedule or Registration Statement No.:
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On July 23, 2008, Tokio Marine Holdings, Inc. issued a press release in Japan in the Japanese
language. An English translation of the press release is as follows:
(English Translation)
July 23, 2008
Tokio Marine Holdings, Inc.
Agreement to acquire Philadelphia Consolidated, a U.S. P&C insurance group
Tokio Marine Holdings, Inc. (TMHD) (President: Shuzo Sumi) today announced a definitive agreement
to acquire 100% of the outstanding shares of Philadelphia Consolidated Holding Corp. (Philadelphia
Consolidated), a U.S. property & casualty (P&C) insurance group (hereinafter: the
Acquisition), through TMHDs wholly owned subsidiary, Tokio Marine & Nichido Fire Insurance Co.,
Ltd. (TMNF).
The Acquisition has been approved unanimously by the Board of Directors of Philadelphia
Consolidated.
1. Background
The Tokio Marine Group has been seeking expansion of its international insurance business as a
driving force for its mid to long term growth strategy through organic growth as well as M&A to
become a global top-tier insurer. Based on this initiative, we entered the Lloyds market through
the acquisition of Kiln Ltd. (Kiln) in March, 2008, subsequent to M&A activities in emerging
markets such as Asia and Brazil. Significantly enhancing its presence in the U.S. represents a key
part of its international strategy.
As described in 2 below and in Appendix 1, Philadelphia Consolidated is one of the best
performers in the U.S. P&C insurance market and has consistently achieved superior growth and
profitability under the leadership of its experienced management since its foundation in 1962.
An acquisition of Philadelphia Consolidated will allow the Tokio Marine Group to significantly
expand its operations in the U.S. insurance market. Combined with the recently completed
acquisition of Kiln, we have established a strong presence in both key U.S. P&C and London
insurance markets. These transactions will provide a solid platform from which we anticipate
considerable organic growth and enable us to realize significant profit expansion from our
international business which, in turn, will lead to sustainable growth for the Tokio Marine Group.
2. Overview of Philadelphia Consolidated
(see Appendix 1 for details)
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Name of the company
: Philadelphia Consolidated Holding Corp. (Bala Cynwyd, in the suburbs of
Philadelphia, Pennsylvania, listed on NASDAQ), is a holding company which through its
subsidiaries owns insurance companies and insurance related companies.
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Description
: Philadelphia Consolidateds strengths include excellent product development
capabilities mainly in specialty products focused on targeted commercial markets, disciplined
operations and marketing expertise utilizing a variety of distribution channels. Philadelphia
Consolidated has achieved far superior growth and profitability than its U.S. P&C insurance
industry peer group. With competitive advantages in each area of expertise, Philadelphia
Consolidated has realized outstanding and reliable profitability without being affected by the
cyclical trend in the U.S. P&C insurance market.
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3. Overview of the Acquisition
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Acquisition Target:
Philadelphia Consolidated Holding Corp. (TMHD intends to acquire 100% of
Philadelphia Consolidateds outstanding shares through TMNF.)
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1
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Acquisition Price:
US$4,705 million (approximately JPY498.7 billion) ($61.50 per share
(approximately JPY6,519)).(*1, 2) This price is a 66.5% premium over the average daily closing
price of the past 12 months until July 21 and a 46.8% premium over the average daily closing
price of 2007. After careful analysis and review of Philadelphia Consolidateds assets,
business operations and prospects, TMHD considers that this price is fair and reasonable.
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(*1)
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Exchange rate is $1 = JPY106, unless otherwise noted.
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(*2)
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The acquisition price includes $408 million (JPY43.2 billion) in respect of stock-linked
compensation such as stock options which have been granted to management and employees.
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Financing:
The Acquisition will be financed through the utilization of Tokio Marine Group
cash on hand, together with borrowings, including non-convertible bond issuance.
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4. Strategic Rationale
(1) Establish a significant presence in the worlds largest U.S. insurance market
The $500 billion U.S. P&C insurance market is the largest in the world. It is an important market
which is expected to grow in the mid to long term in accordance with the growth of its population
and economy. The Tokio Marine Group has been operating in the U.S. insurance market mainly
specializing in Japanese-related large commercial business through the U.S. Branch of TMNF and its
subsidiaries. The acquisition of Philadelphia Consolidated enables us to significantly enhance our
U.S. platform for local commercial business and to fully realize this key international market.
(2) International expansion of revenues and profits
Acquisition of Philadelphia Consolidated will significantly expand revenues (net premiums written)
and profits (adjusted earnings)(*3) from the international business of the Tokio Marine Group. The
profits/losses of Philadelphia Consolidated will be consolidated to TMHDs financial statements
from FY 2009. If we, however, simulate the pro forma based combined figures (*4) with forecast of
Philadelphia Consolidated for the end of FY 2008, this transaction will increase the pro forma
revenues (net premiums written) and adjusted earnings of Tokio Marines international business (FY
2008 forecasts)(*5) by approximately 35 percent and 95 percent, respectively, and will deliver
greater earnings consistency throughout the insurance pricing cycle.
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(*3)
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Adjusted earnings: our own indicator that clarifies pure profits or losses for the period by
eliminating the effects of various reserves particular to the Japanese non-life insurance
business as well as deducting factors such as realized gains/losses and unrealized losses of
assets, the sources of which are not necessarily attributable to the current period alone. The
amortization of goodwill is not included.
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(*4)
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The figures of the Tokio Marine Group include Kilns profits which will contribute to TMHDs
consolidated financial statements from FY 2008.
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(*5)
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The contribution of Philadelphia Consolidated is based on simulation using FY 2008 forecasts,
while its profits/losses will be consolidated with Tokio Marines financial statements from FY
2009. Figures of Philadelphia Consolidated are based on its own forecast.
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<Simulation using FY 2008 forecasts of the international business (pro forma basis)>
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(JPY in billions)
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Net Premiums Written
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Adjusted Earnings
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Total international business
of the Tokio Marine Group
including Kiln
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547.3
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31.7
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Philadelphia Consolidated
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Approx. 195
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Approx. 30
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Total
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Approx. 740
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Approx. 62
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(Exchange rates are as of the end of December, 2007. $1 = JPY114.15.)
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(3) Expansion of profits of the Tokio Marine Group and creation of well-balanced global portfolio
(
see Appendix 2 for details
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Through the acquisition of Philadelphia Consolidated, the adjusted earnings of the
international insurance business within the Tokio Marine Group will increase from 21% to 35% on a
pro forma basis combining the two companies based on FY 2008 forecasts.
2
This will enable the Tokio Marine Group to achieve
further growth of its profits by significantly increasing its international business portfolio
which has higher growth potential than the Japanese domestic equivalent.
In addition, the acquisition of Philadelphia Consolidated will bring greater geographical balance
to its international portfolio.
5. Expansion of new business by taking advantage of both companies strengths
Philadelphia Consolidateds competitive advantages include product development capabilities and
strong marketing skills utilizing various distribution channels, while Tokio Marines include a
superior credit rating, financial strength, large underwriting capacity and a global network. In
conjunction with synergies from the Kiln acquisition, these strengths will enable Tokio Marine to
pursue further growth in the U.S. insurance market as well as jointly entering other markets.
Specifically, we will consider the following initiatives:
(1) Business expansion with the Tokio Marine Groups superior financial rating and solid financial
ground
We will expand Philadelphia Consolidateds business in the U.S., leveraging our superior credit
rating and financial strength. In addition, by utilizing the underwriting capacity of the Tokio
Marine Group, we will enhance profits and ROE through efficient management of Philadelphia
Consolidateds ceded reinsurance.
(2) Expansion to markets outside of U.S. by utilizing global network of the Tokio Marine Group
We will transfer Philadelphia Consolidateds business models to non-US markets such as Canada and
Central and South America through our global network.
(3) Formation of joint projects with Kiln
After the Acquisition, we intend to establish an International Strategic Committee formed by the
top management of TMHD, Kiln and Philadelphia Consolidated. The Committee will discuss strategic
initiatives which lead to further growth and profits of the groups international business.
Philadelphia Consolidated, Kiln and TMHD will start considering joint initiatives such as
cross-selling of Kilns specialist products through Philadelphia Consolidateds distribution
channels of 47 offices across the U.S. and making Philadelphia Consolidateds products for
specialized commercial sectors available in Europe.
6. Acquisition Process
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Under and in accordance with applicable laws and regulations in the
U.S., the Acquisition will be implemented by first establishing TMNFs
100% owned special purpose company called Tokio Marine Investment
(Pennsylvania) Inc. (TMIP) (registration pending) in Pennsylvania,
and then merging Philadelphia Consolidated and TMIP (*6). The merger
requires a majority approval of Philadelphia Consolidateds
shareholders present at a special meeting called to vote on the
Acquisition, and the approval of the shareholder of TMIP. The
surviving company subsequent to the merger will be Philadelphia
Consolidated. Through this process, TMNF will purchase the entire
outstanding shares in return for consideration ($61.50 of cash per
share) to Philadelphia Consolidateds shareholders. The Acquisition is
subject to approval of various regulatory authorities of Japan and the
U.S. as well as the U.S. antitrust law authorities.
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As to closing, we intend to proceed expeditiously and expect to
complete the process by the fourth quarter of 2008.
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(*6)
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This process is called reverse triangular merger under the related laws and regulations in
the U.S., which is similar to triangular merger in Japan. This is a common method used for
acquisitions in the U.S.
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7. Impact on financial results of TMHD
The acquisition of Philadelphia Consolidated will contribute to consolidated profit and loss
statements of TMHD from FY 2009 and onwards.
3
Cautionary Statement Regarding Forward-Looking Statements
Certain statements in this press release may constitute forward-looking statements. Actual
results could differ materially from those projected or forecast in the forward-looking statements.
The factors that could cause actual results to differ materially include those referred to in
Philadelphia Consolidateds filings with the U.S. Securities and Exchange Commission (the SEC),
as well as the following: operating costs, customer loss and business disruption (including,
without limitation, difficulties in maintaining relationships with employees, customers or
suppliers) may be greater than expected following the announcement of the transaction; the
retention of certain key employees at Philadelphia Consolidated; the conditions to the completion
of the transaction may not be satisfied, or the regulatory approvals required for the transaction
may not be obtained on the terms expected or on the anticipated schedule; the parties may not be
able to meet expectations regarding the timing, completion and accounting and tax treatments of the
merger. TMHD assumes no obligation to update the information in this press release, except as
otherwise required by law. Readers are cautioned not to place undue reliance on these
forward-looking statements that speak only as of the date hereof.
Additional Information and Where to Find It
This communication may be deemed to be solicitation material in respect of the proposed acquisition
of Philadelphia Consolidated by TMHD. In connection with the proposed acquisition, Philadelphia
Consolidated intends to file relevant materials with the SEC, including Philadelphia Consolidateds
proxy statement on Schedule 14A.
STOCKHOLDERS OF PHILADELPHIA CONSOLIDATED ARE URGED TO READ ALL
RELEVANT DOCUMENTS FILED WITH THE SEC, INCLUDING PHILADELPHIA CONSOLIDATEDS PROXY STATEMENT,
BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.
Investors and
security holders will be able to obtain the documents free of charge at the SECs web site,
http://www.sec.gov,
and Philadelphia Consolidated stockholders will receive information at an
appropriate time on how to obtain transaction-related documents for free from Philadelphia
Consolidated. Such documents are not currently available.
Participants in Solicitation
TMHD, and Philadelphia Consolidated and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from the holders of Philadelphia Consolidated common
stock in respect of the proposed transaction. Information about the directors and executive
officers of Philadelphia Consolidated is set forth in the proxy statement for Philadelphia
Consolidateds 2008 Annual Meeting of Stockholders, which was filed with the SEC on April 15, 2008.
Investors may obtain additional information regarding the interest of such participants by reading
the proxy statement regarding the acquisition when it becomes available.
4
Appendix 1
Overview of Philadelphia Consolidated
1. Philadelphia Consolidated was founded by James J. Maguire (current Chairman) in 1962
2. The headquarters are located in Bala Cynwyd, in the suburbs of Philadelphia, Pennsylvania, the U.S.
3. Group structure:
Philadelphia Consolidated Holding Corp. (NASDAQ: PHLY) owns, directly and indirectly, 100% shares
of insurance subsidiaries such as Philadelphia Indemnity Insurance Company and Philadelphia
Insurance Company as well as other insurance related subsidiaries.
4. Financial Results
(1) Latest financial highlights
(Unit: $ in millions)
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2006
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2007
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Gross premiums written
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1,493
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1,692
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Net premiums written
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1,283
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1,460
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Net income after-tax
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289
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327
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Total assets
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3,439
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4,100
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Shareholders equity
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1,167
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1,547
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Combined ratio (%)
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68.3
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74.3
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Return on equity (%)
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29.1
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24.1
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(2) Growth and profitability of the past 10 years
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Growth: The average compound annual growth rate of net premiums written of the past 10
years is 29.3%, compared with the industry average of 4.7%.
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Growth rate of net premiums written
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(Unit: %)
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Year
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1998
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1999
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2000
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2001
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2002
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2003
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2004
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2005
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2006
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2007
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CAGR
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Philadelphia
Consolidated
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27.9
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28.7
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43.1
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28.0
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54.1
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15.9
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51.8
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21.5
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15.5
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13.8
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29.3
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Industry
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1.2
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1.9
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5.0
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8.4
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15.3
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10.0
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3.9
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0.5
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2.7
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-1.2
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4.7
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Difference
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26.7
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26.8
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38.1
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19.6
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38.8
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5.9
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47.9
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21.0
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12.7
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15.0
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24.6
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Profitability: The average combined ratio (*7) of the past 10 years is 85.1%, compared
with the industry average of 103.5%. Philadelphia Consolidated has consistently achieved
one of the best combined ratios among all U.S. P&C insurers.
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Combined ratio
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(on a statutory accounting basis)
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(Unit: %)
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Year
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1998
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1999
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2000
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2001
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2002
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2003
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2004
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2005
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2006
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2007
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Average
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Philadelphia
Consolidated
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85.1
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93.3
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89.1
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91.9
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91.5
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90.3
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88.7
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78.1
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68.3
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74.3
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85.1
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Industry
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105.9
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108.0
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110.1
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115.8
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107.5
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100.1
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98.4
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100.8
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92.5
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95.6
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103.5
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Difference
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-20.8
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-14.7
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-21.0
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-23.9
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-16.0
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-9.8
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-9.7
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-22.7
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-24.2
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-21.3
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-18.4
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(*7)
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Combined ratio is a measure of underwriting profitability, calculated by dividing the
sum of incurred losses and expenses by premium. 100% combined ratio means break-even while
lower than 100% means more profitable.
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(3) Philadelphia Consolidateds stock has been a top performer among major U.S. listed P&C insurers
(38 group companies), with 10-year average total shareholders returns of approximately 18%.
5
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5. Fiscal year:
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January December
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6. Financial ratings:
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Moodys: A1
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A.M. Best: A+ (Superior)
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7. Management:
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Chairman: James J. Maguire
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CEO: James J. Maguire, Jr.
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8. Number of employees:
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Approximately 1,400
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9. Office network:
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47 regional and field offices across the U.S.
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6
Appendix 2
<Simulation using FY 2008 forecasts (pro forma basis)(*8)>
1. The distribution of the adjusted earnings of the Tokio Marine Group
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Before acquisition(*9)
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After acquisition(*10)
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Domestic non-life insurance
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52%
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43%
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Domestic life insurance
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26%
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21%
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International insurance
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21%
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35%
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Asset management and other non-insurance
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1%
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1%
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2. The geographical distribution of net premiums written of the Tokio Marine Groups
international business
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Before acquisition (*9)
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After acquisition(*10)
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North and Central America
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12%
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35%
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South America
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32%
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24%
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Asia and Oceania
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24%
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18%
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Europe and Middle East
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19%
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14%
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Reinsurance
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13%
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9%
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(*8)
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Pro forma basis combining forecasts of the Tokio Marine Group and Philadelphia Consolidated.
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(*9)
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The figures of the Tokio Marine Group include profits of Kiln which will contribute to
TMHDs consolidated profit and loss statements from FY 2008. Exchange rates are based on the
rates of the end of December, 2007 ($1 = JPY114.15).
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(*10)
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The contribution of Philadelphia Consolidated is based on simulation using FY 2008
forecasts, while its profits/losses will be consolidated with Tokio Marines financial
statements from FY 2009. Figures of Philadelphia Consolidated are based on its own forecast.
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7
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